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Westpac Forecasts Interest Rates To Rise 3%

In a new report to Westpac Private Banking customers he said that Westpac has revised up their forecasts for the economy. That upward revision has been mainly due to a surprisingly strong boost to business and consumer confidence supported by generally stronger conditions in housing, credit, and commodity markets.

Related to the improved outlook for commodities has been the strong recovery in economic conditions in China in the first half of 2009, he said

He wrote “While domestic and global economic conditions have improved we remain suspicious about prospects for a “V” shaped recovery for Australia and certainly for the major economies in US; Europe and Japan.

Markets currently expect central banks to start “taking back” the aggressive rate cuts which they implemented during the financial crisis through 2010. To the contrary, we expect that the profile of the “recovery” will be fragile and central banks will be reluctant to risk “killing” the recovery before it gains a much more solid foundation than we expect will be likely through 2010.

He said that for Australia the situation is different mainly because our financial system has been resilient; the policy response from the authorities has been swift and effective and it now appears likely that we will avoid a technical recession. We think it reasonable that the Reserve Bank will be prepared to start tightening rates well before the US and Europe – most likely in the first half of 2010. The Bank is expected to be fairly careful in the early implementation of the tightening cycle raising rates by around 100 bp’s in the first year.

Markets are impatient expecting rates to start rising around October/ November with a total increase of around 150 bp’s by the middle of next year. We expect swap rates will ease back a little over the course of the second half of 2009 as markets become more aware of the “patience” that the Reserve Bank is likely to exercise in 2009.

There are still significant uncertainties in the Australian outlook to soothe the Bank’s current concern that interest rates have been set too low. We expect the unemployment rate to rise by around 1 ppt’s to 6.75% by the end of 2009 and a further 0.75 ppt’s to 7.5% by the middle of next year.Evans said that consumer sentiment is likely to be adversely affected by speculation of rising rates and the disappointment factor associated with the curtailment of any further direct cash grants from the government.

Lower Consumer Sentiment and rising unemployment are likely to keep the Reserve Bank from He also said that rates will rise to 4% by December 2010 and 6.0% by 2013.

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